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Healthcare Finance 101: Co-Pays, Deductibles, Insurance Types & More

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Welcome class, take your seats.  In today’s APennyLearned classroom you have come to this article to brush up on your knowledge of healthcare finance.  We will break down this complex topic in a simple, digestible manner that won’t make you sick.

A recent survey found only 4% of Americans understand important health insurance concepts!  Let’s make you one of the top 4% by the end of this page, it’s important for your health and your wallet alike.

How much can you save by being knowledgeable about health insurance?  Jennifer Fitzgerald, CEO of PolicyGenius said,

It could cost you an extra $1,000 or $2,000 for not understanding health insurance concepts

Simply not understanding how a deductible or how coinsurance works when heading to the doctor can cost you thousands!  There goes that new iPhone X you have been saving for.

1. Copay

Copay definition- It simply means the fixed cost for a procedure or doctoral visit.

If your health insurance plan has co-pays these should be apparent to you when you sign up for the plan.  These may also be printed on your ID card.

Here is a sample-

Doctor’s Office Visit- $20

Specialty Visit- $35

Emergency Room Visit- $75

These types of plans are nice as no matter what the actual costs of the actual services turn out to be you don’t care as your insurance pays the difference. They promise that you just pay the co-pay.  Let’s say one ER visit was billed at $1,000 and another was billed at $10,000, the end patient wouldn’t care in the situation as they are only needed to pay the co-pay of $75.

Not all health insurance plans have copays and this style of insurance is becoming less prominent in recent years.

2. Deductible

This term may be familiar to some as it applies to other types of insurance such as home warranty, renter’s, auto, others, and of course health!

Deductible Definition- A deductible is the covered amount the policyholder pays before insurance kicks in.

Scenario-

  • Amelia has a deductible of $2,000.

This means they will pay the first $2,000 by themselves (or out of pocket) directly to the doctor as the insurance will not pay or “kick in” until then.  Once the member hits that deductible then something called coinsurance happens (see the next one for that).

Go back up and look at the definition again, did you notice the word covered?  This is key as a policyholder may be exposed to additional costs outside of this dollar amount and have unexpected bills.

Here are two examples of non-covered expenses that would not apply to a standard deductible.

  1. If one visits an out of network doctor. Example- you go to the nearest doctor and that clinic happens to be out of network, not covered by your insurance.
  2. If there is a non-covered medical expense. Example- Frequently custom orthotics (insoles for shoes) are only covered if one has diabetes.

So even if you have hit your deductible for the year and you trip one of the above you will be paying out of pocket at 100%, just as if you haven’t hit your deductible. 

3. Coinsurance

Coinsurance definition- Coinsurance is what pays or “kicks in” after a deductible has been met.  Coinsurance is where the insurance company shares the costs with the member.

The most common coinsurance rate is 80/20 which means the insurance company pays 80% and the member pays 20%.

Let’s go back to our scenario-

  • Amelia has a deductible of $2,000.
  • Amelia’s coinsurance amount is 80/20
  • Amelia goes to the hospital and has a bill of $10,000
  • What does she owe?

Amelia will, of course, pay the first $2,000.  Then there is a remainder of $8,000 on her bill, this will be split amongst her and her insurance provider.  The insurer will pay $1,600 and Amelia will pay the remaining $6,400.  This brings her total exposure to $8,400.

But what happens if there is a really large bill, what is insurance even for if we have to pay that much out of pocket?  I’m glad you asked.

4. Out-of-pocket Maximum

Out-of-pocket Maximum Definition- The maximum amount that a member will have to pay out of pocket in a given year. 

Let’s go back to our scenario on final time-

  • Amelia has a deductible of $2,000.
  • Amelia’s coinsurance amount is 80/20
  • Her out-of-pocket Maximum is $7,500.
  • Amelia goes to the hospital and has a bill of $10,000
  • What does she owe?

(Say it with me)

Amelia will, of course, pay the first $2,000.  Then there is a remainder of $8,000 on her bill, this will be split amongst her and her insurance provider.  The insurer will pay $1,600 and Amelia will pay the remaining $6,400.  This brings her total exposure to $8,400.

Wait a second.  Her out-of-pocket maximum is only $7,500. 

In this case, Amelia would only pay $7,500 and the insurance provider would pay $1,600 of co-insurance plus the remaining $900 after she met her out of pocket maximum.  Having this out-of-pocket maximum saved Amelia $900!

Editor’s Note- Insurance plans are on an annual basis.  This means if Amelia were to meet her out-of-pocket maximum on Christmas, she would have a brand new out-of-pocket maximum on January 1st.  Poor Amelia! 

5. Flexible Spending Account & Health Savings Account

Flexible Saving Account (FSA) & Health Savings Account (HSA) definitions- Savings accounts that are “tax-free” and can be used on qualified medical expenses.

FSA & HSA are very similar a few small differences are-

  1. The balance within an HSA can be rolled over year to year, whereas the balance within an FSA does not. With an FSA you either use it or lose it.  It’s important not to overfund an FSA because of this.
  2. FSA’s can be used for childcare expenses, whereas HSA’s cannot.
  3. Self-employed individuals are not eligible for an FSA, whereas they are with an HSA.

Back to Amelia one last time.

We have determined that Amelia as to pay $7,500 for her hospital bill.  If she has $7,500 in her HSA/FSA she could use those funds rather than pull it from her precious emergency fund?  Why does it matter though?  Let’s say she has the option to use either.

  1. The cash that Amelia has sitting in her bank account she has been saving through her paychecks are already taxed. Let’s say 20% for the sake of discussion.
  2. The balance within Amelia’s HSA is “tax-free” meaning it is allowed to enter and exit the account without being taxed at her standard income tax rate (restrictions apply).

Amelia had to earn $9,375 gross at her job to net $7,500 into her savings account.  ($9,375 less the 20% tax rate.)

Amelia had to earn only $7,500 at her job to net $7,500 into her FSA/HSA.

By using and funding her FSA/HSA Amelia saved $1,875!

6. Health insurance money-saving tips

Find the right health insurance plan from the get

Most people do rely on their employer for health insurance however, increasingly people are self-employed in the gig economy and do not have that luxury.  A health insurance company is great to work with; however, they can only help you select one of their products.  A health insurance broker can help select the right plan for you across dozens of carriers.

Simply understanding your plan

No one enjoys health insurance but most of us need it and can protect us in case of a significant injury or disease.  Ways to save money are to simply select in-network providers and to cost shop procedures and appointment costs. President Trump mandated health providers to share price transparency in an attempt to give consumers more power and options for care.

Check for discounts and perks.

There are often fitness reimbursements that will pay for your gym membership.  Your health insurance company wants you to be active and healthy as people who work out more visit the doctor less.  You can save $2,500 per year.

Other perks may include free wearable fitness trackers or free wellness coaching or other programs.

Use those HSA’s & FSA’s

Do I need to remind you of Amelia’s hospital bill again?

7. What if I don’t have health insurance at all

Before 2018 there was a government mandate that most individuals needed to have health insurance coverage. The fine was $695 per adult or 2.5% of household income, whichever was greater.  Given the political atmosphere, this mandate could someday come back into effect.

Many doctor clinics will not allow one to even make an appointment without health insurance.  If you’re in this boat it is important to have additional cash on hand to enable negotiations for payments in cash.

The main reason for healthcare is to combat catastrophic bills, basically bankruptcy insurance.

If you do not have health insurance aPennyLearned highly recommends you contact a health insurance broker to protect your financial future.  Many lives have been ruined by exorbitant medical bills.

A heart attack can cost $109,000+, ain’t nobody got time (or money for that)!

Conclusion

Healthcare insurance is not so scary after all even though most of us are terrified of calling and making an appointment.

What is your experience with health insurance?  What are your money-saving tips?

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